STRATEGY ANALYSIS AND CHOICE

OUTLINE The Nature of Strategy Analysis and Choice A Comprehensive Strategy-Formulation Framework The Input Stage The Matching Stage The Decision Stage Cultural Aspects of Strategy Choice The Politics of Strategy Choice The Role of a Board of Directors

OBJECTIVES After studying this paper, you should be able to do the following: 1. 2. 3. 4. 5. 6. Describe a three-stage framework for choosing among alternative strategies. Explain how to develop a TOWS Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and QSPM. Identify important behavioral, political, ethical, and social responsibility considerations in strategy analysis and choice. Discuss the role of intuition in strategic analysis and choice. Discuss the role of organizational culture in strategic analysis and choice. Discuss the role of a board of directors in choosing among alternative strategies.

PAPER OVERVIEW Strategic analysis and choice largely involve making subjective decisions based on objective information. This paper introduces important concepts that can help strategists generate feasible alternatives, evaluate those alternatives, and choose a specific course of action. Behavioral aspects of strategy formulation are described, including politics, culture, ethics, and social responsibility considerations. EXTENDED PAPER OUTLINE WITH TEACHING TIPS I. THE NATURE OF STRATEGY ANALYSIS AND CHOICE A. Focus on establishing long-term objectives, generating alternative strategies, and selecting strategies to pursue. B. The Process of Generating and Selecting Strategies 1. Strategists never consider all feasible alternatives that could benefit the firm, because there are an infinite number of possible actions and an infinite number of ways to

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implement those actions. Therefore, a manageable set of the most attractive alternative strategies must be developed. 2. Identifying and evaluating alternative strategies should involve many of the managers and employees who earlier assembled the organizational mission statement, performed the external audit, and conducted the internal audit. 3. Alternative strategies proposed by participants should be considered and discussed in a meeting or series of meetings. VTN (Visit the Net): http://www.csuchico.edu/mgmt/strategy/module1/sld050.htm cautions against planners usurping the responsibility of line managers in strategic planning. Tip: The Mindtools website {http://www.mindtools.com/planpage.html} provides more than 30 pages of narrative about how and why to do strategic planning. Planning templates are provided. II. A COMPREHENSIVE STRATEGY-FORMULATION FRAMEWORK A. Important Strategy-Formulation Techniques 1. Important strategy-formulation techniques can be integrated into a three-stage decision-making framework. The tools presented in this framework are applicable to all sizes and types of organizations and can help strategists identify, evaluate, and select strategies. 2. The framework described above has three stages: a. Stage 1: The Input Stage b. Stage 2: The Matching Stage c. Stage 3: The Decision Stage 3. All nine techniques included in the strategy-formulation framework require integration of intuition and analysis. VTN (Visit the Net): http://www.csuchico.edu/mgmt/strategy/module1/sld022.htm gives the purpose and characteristics of objectives. III. THE INPUT STAGE A. The Input Stage includes the External Factor Evaluation (EFE) Matrix, the Competitive Profile Matrix (CPM), and the Internal Factor Evaluation (IFE) Matrix. B. Procedures for developing an EFE Matrix, an IFE Matrix, and a CPM were presented in earlier documents. C. The input tools require strategists to quantify subjectively during early stages of the strategy-formulation process. Making small decisions in the input matrices regarding the relative importance of external and internal factors allows strategists to generate and evaluate alternative strategies more effectively. IV. THE MATCHING STAGE A. The Matching Stage

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1. The Matching Stage includes the Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix, the Strategic Position and Action Evaluation (SPACE) Matrix, the Boston Consulting Group (BCG) Matrix, the Internal-External (IE) Matrix, and the Grand Strategy Matrix. 2. Any organization, whether military, product-oriented, service-oriented, governmental, or even athletic must develop and execute good strategies to win. VTN (Visit the Net): http://www.csuchico.edu/mgmt/strategy/module1/sld024.htm gives example objectives. B. The TOWS Matrix 1. The TOWS Matrix is an important matching tool that helps managers develop four types of strategies: a. SO strategiesuse a firms internal strengths to take advantage of external opportunities. b. WO strategiesare aimed at improving internal weaknesses by taking advantage of external opportunities. c. ST strategiesuse a firms strengths to avoid or reduce the impact of external threats. d. WT strategiesare defensive tactics directed at reducing internal weaknesses and avoiding external threats. 2. A schematic representation of the TOWS Matrix is provided in the other planning documents. 3. There are eight steps to construct a TOWS Matrix: List the firms key external opportunities. List the firms key external threats. List the firms key internal strengths. List the firms key internal weaknesses. Match internal strengths with external opportunities and record the resulting SO strategies in the appropriate cell. f. Match internal weaknesses with external opportunities and record the resulting WO strategies. g. Match internal strengths with external threats and record the resultant ST strategies. h. Match internal weaknesses with external threats and record the resulting WT strategies. a. b. c. d. e. VTN (Visit the Net): http://www.planware.org/strategicsample.htm provides a sample strategic plan as well as the basis for a TOWS matrix.

C. The SPACE Matrix

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1. The SPACE Matrix, another important Stage 2 matching tool. Its four-quadrant framework indicates whether aggressive, conservative, defensive, or competitive strategies are more appropriate for a given organization. 2. Depending on the type of organization, numerous variables could make up each of the dimensions represented on the axes of the SPACE Matrix. 3. The steps to develop a SPACE Matrix: a. Select a set of variables to define financial strength (FS), competitive advantage (CA), environmental stability (ES), and industry strength (IS). b. Assign a numerical value ranging from 1 (worst) to 6 (best) for the variables that make up the FS and IS dimensions. Assign a number between 1 (best) to 6 (worst) for variables that make up the ES and CA dimensions. c. Compute an average score for FS, CA, IS, and ES by summing the values given to the variables and dividing by the number of variables included in each dimension. d. Plot the average scores for FS, IS, ES, and CA on the appropriate axis in the SPACE Matrix. e. Add the two scores on the x-axis and plot the resultant point on X. Add the two scores on the y-axis and plot the resultant point on Y. Plot the intersection of the new xy point. f. Draw a directional vector from the origin of the SPACE matrix through the new intersection point. This vector reveals the type of strategies recommended for the organization. 1. 2. 3. 4. Aggressive Competitive Defensive Conservative

D. The BCG Matrix 1. The BCG Matrix graphically portrays differences among divisions (of a firm) in terms of relative market share position and industry growth rate. 2. The BCG Matrix: Divisions in the respective circles in the BCG Matrix are called question marks, stars, cash cows, and dogs. 3. The four quadrants represent the following: a. Question MarksDivisions in Quadrant I have a low relative market share position, yet compete in a high-growth industry. Generally these firms cash needs are high and their cash generation is low. b. StarsQuadrant II businesses represent the organizations best long-run opportunities for growth and profitability. These businesses have a high relative market share and compete in high growth rate industries.

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c. Cash CowsDivisions positioned in Quadrant III have a high relative market position, but compete in a low-growth industry. Called cash cows because they generate cash in excess of their needs. d. DogsQuadrant IV divisions of the organization have a low relative market share position and compete in a slowed or no-growth industry; they are Dogs in a firms portfolio. E. The IE Matrix. 1. The IE Matrix positions an organizations various divisions in a nine-cell display. 2. The IE Matrix is similar to the BCG Matrix in that both tools involve plotting organization divisions in a schematic diagram; this is why they are called portfolio matrices. 3. Differences between the IE Matrix and the BCG Matrix a. Axes are different b. IE Matrix requires more information about divisions than BCG c. Strategic implications of each matrix are different F. The Grand Strategy Matrix 1. In addition to the TOWS Matrix, SPACE Matrix, BCG Matrix, and IE Matrix, the Grand Strategy Matrix has become a popular tool for formulating alternative strategies. All organizations can be positioned in one of the Grand Strategy Matrixs four strategy quadrants. 2. The Grand Strategy Matrix is pictured in the other planning documents. 3. It is based on two evaluative dimensions: competitive position and market growth. V. THE DECISION STAGE A. The Quantitative Strategic Planning Matrix (QSPM) 1. Other than ranking strategies to achieve the prioritized list, there is only one analytical technique in the literature designed to determine the relative attractiveness of feasible alternative actions. 2.&3. This technique is the QSPM, which comprises Stage 3 of the strategy-formulation analytical framework. This technique objectively indicates which alternative strategies are best. 4. Six steps to developing a QSPM: a. b. c. d. Make a list of the firms key external opportunities/threats and internal strengths/weaknesses in the left column of the QSPM. Assign weights to each key external and internal factor. Examine the Stage 2 matrices and identify alternative strategies that the organization should consider implementing. Determine the Attractiveness Scores (AS).
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e. f.

Compute the total AS. Compute the sum Total AS.

B. Positive Features and Limitations of the QSPM 1. A positive feature of the QSPM is that sets of strategies can be examined sequentially or simultaneously. Another positive feature of the QSPM is that it requires strategists to integrate pertinent external and internal factors into the decision process. Developing a QSPM makes it less likely that key factors will be overlooked or weighted inappropriately. 2. The QSPM is not without some limitations. First, it always requires intuitive judgment. Second, it can only be as good as the prerequisite information and matching analyses upon which it is based. VI. CULTURAL ASPECTS OF STRATEGIC CHOICE A. Culture includes the set of shared values, beliefs, attitudes, customs, norms, personalities, heroes, and heroines that describe a firm. B. All Organizations Have a Culture 1. It is beneficial to view strategic management from a cultural perspective because success often rests on the degree of support that strategies receive from a firms culture. 2. If a firms strategies are supported by cultural products such as values, beliefs, rites, rituals, ceremonies, stories, symbols, language, heroes, and heroines then managers often can implement changes swiftly and easily. 3. Strategies that require fewer cultural changes may be more attractive because extensive changes can take considerable time and effort. VII. THE POLITICS OF STRATEGY CHOICE A. In the absence of objective analyses, strategy decisions too often are based on the politics of the moment. With development of improved strategy-formulation tools, political factors become less important in making strategic decisions. B. Tactics to aid in strategy: 1. 2. 3. 4. 5. Equifinality Satisfying Generalization Focus on Higher-Order Issues Provide Political Access on Important Issues
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C.VIII. THE ROLE OF A BOARD OF DIRECTORS A.&B. A director is one of a group of persons entrusted with the overall direction of a corporate enterprise. A board of directors is a group of persons elected by the

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ownership of a corporation to have oversight and guidance over management and to look out for the shareholders interests. C. Business Weeks annual board of directors evaluation posited that good boards of directors actively perform the following responsibilities: 1. Evaluate the CEO annually. 2. Link the CEOs pay to specific goals. 3. Evaluate long-range strategy. 4. Evaluate board performance. 5. Compensate board member only in company stock. 6. Require each director to own a large amount of company stock. 7. Ensure no more that two board members are insiders. 8. Require directors to retire at age seventy. 9. Place the entire board up for election every year. 10. Limit the number of other boards a member can serve on. 11. Ban directors who draw consulting fees or other monies from the company. 12. Ban interlocking directorships. VTN (Visit the Net): http://www.csuchico.edu/mgmt/strategy/module1/sld054.htm elaborates on the role of the board of directors. The website, www.apeo.org/guide/, provides details about strategic planning in a church and http://www.financenet.gov/financenet/fed/docs/strat.htm gives the strategic plan for many government agencies.

ISSUES FOR REVIEW AND DISCUSSION 1. How would application of the strategy-formulation framework differ from a small to a large organization? Answer: The strategy-formulation framework is conceptually identical for both small and large organizations. However, in large organizations, there are more variables to analyze and forecast. This makes the strategy-formulation process more complex. 2. What types of strategies would you recommend for an organization that achieves total weighted scores of 3.6 on the IFE and 1.2 on the EFE Matrix? Answer: Hold-and-maintain-type strategies are appropriate for an organization that scores 3.6 on the IFE Matrix and 1.2 on the EFE Matrix. 3. Given the following information, develop a SPACE Matrix for the XYZ Corporation: FS = +2; ES = -6; CA = -2; IS = +4. Answer: This is an interesting exercise for strategists. The directional vector of the SPACE Matrix lies in the lower right quadrant, indicating that competitive-type strategies are most appropriate. 4. Given the information in the table below, develop a BCG Matrix and an IE Matrix: Divisions 1 2 3

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Profits Sales Relative Market Share Industry Growth Rate IFE Total Weighted Success EFE Total Weighted Success Answer:

$10 $100 0.2 +.20 1.6 2.5

$15 $50 0.5 +.10 3.1 1.8

$25 $100 0.8 -.10 2.2 3.3

Relative Market Share

BCG Matrix:

High (1.0)

Medium (.50)

Low (0.0)

IE Matrix:

Strong (3-4)

Avg (2-2.99)

Weak (1-1.99)

IFE

High (3-4)

Medium (2-2.99) EFE Low (1-1.99) 2 1

This assignment works well as a take-home exercise. 5. Explain the steps involved in developing a QSPM. Answer: There are six basic steps involved in applying QSPM: Make a list of the firms key external opportunities/threats and internal strengths/weaknesses in the left column of the QSPM. Assign weights to each key external and internal factor. Examine the Stage 2 matrices and identify alternative strategies that the organization should consider implementing. Determine the AS. Compute the total AS. Compute the sum Total AS. 6. How would you develop a set of objectives for a school of business? Answer: A school of business should develop a set of objectives and strategies in the same way as any other type of organization. That is, a mission statement would need to be established, an

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external and internal audit performed, and strategy-formulation techniques used to effectively develop a set of objectives and strategies. 7. What do you think is the appropriate role of a board of directors in strategic management? Why? Answer: Board members should review strategy formulation, implementation, and evaluation reports. As described in the paper, board members are, more and more, being held personally liable for failed strategies in organizations. Board members should provide input, advice, suggestions, and comments about strategic-management activities. 8. Discuss the limitations of various strategy-formulation analytical techniques. Answer: All analytical techniques have limitations. Limitations of strategy-formulation techniques are described in the paper. However, analytical techniques are greatly helpful in assimilating and organizing information in a way that enhances strategic decision making. As long as strategists do not allow analytical tools to dictate decisions, such techniques are helpful. Emphasize to strategists that discussion of the implications of the various matrices for a particular firm is exceptionally important. Strategists must go beyond the numbers to the meaning and implications. 9. Explain why cultural factors should be an important consideration in analyzing and choosing among alternative strategies. Answer: Cultural factors are an integral part of everyday life in organizations. An organizations unique culture represents the heart of work. Thus, in choosing among alternative strategies for an organization, consideration should be given to the different levels of support that proposed strategies would receive from existing cultural products. Consideration should also be given to whether cultural changes could be achieved readily. 10. How are the TOWS Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix similar? How are they different? Answer: The TOWS Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix are similar in that all are matching tools in stage two of the strategy-formulation framework. These analytical tools differ, in that they focus on different variables. Also, the BCG and IE Matrices generally apply only to a multidivisional firm, whereas the TOWS, SPACE, and Grand Strategy Matrices are applicable to all organizations. 11. How would profit and nonprofit organizations differ in their applications of the strategyformulation framework? Answer: The strategy-formulation framework is conceptually identical for both profit and nonprofit organizations, although the nature of variables would differ for each type of organization.